Prof Skegg (62) plans to leave on July 31, 2011, by which time he will have completed seven years in the role.
Although he had the option of remaining in the post until mid-2014, he believed he should not stay longer than seven years, he told staff in an email on Tuesday.
While only required to give three months' notice, Prof Skegg said he had announced his decision now to give the university council "ample time" to find a replacement.
Prof Skegg declined an interview yesterday, but said in an email he and his wife, Dr Keren Skegg, planned to remain in Dunedin, a city which had "cast its spell on him" when he first arrived from Auckland in 1967.
He did not say whether he would retire or continue as a university staff member but said he was looking forward to having more time for research, advisory work and personal interests.
Respected for his academic and research achievements and his straightforward approach, Prof Skegg's appointment to the top job in 2004 was warmly welcomed.
At the time, he made it clear one of his goals was to strengthen Otago's focus on research and take the institution to the top of the New Zealand Performance Based Research Fund (PBRF) rankings, a goal achieved in 2006.
Another goal was to increase the postgraduate roll. In 2005, Otago had 829 postgraduate doctoral students; by last year, the total had grown to 1264.
Otago has also increased its share of annual research grants from organisations such as the Health Research Council and the Marsden Fund.
Former university chancellor Lindsay Brown, who was involved with the appointment of Prof Skegg and worked with him for four and a-half years, said yesterday the somewhat unusual decision to appoint "someone from our own backyard" had proved successful.
"He is an outstanding leader and we have been very fortunate to have him ...
Among his numerous good qualities are his ability to think strategically, clearly communicate his vision for the university and take people with him as he implements it."
Prof Skegg also did not shrink from making tough decisions, Mr Brown said.
"What he has to say is always worth listening to, which is why he has the happy knack of conveying hard messages to those in high places yet retaining their respect."
Present chancellor John Ward said Prof Skegg was an "outstanding" vice-chancellor and the university was extremely pleased he would be continuing until next year.
The search for a new vice-chancellor would begin shortly, Mr Ward said.
An advisory committee would be established to oversee the search, and to make an appointment recommendation to the university council in due course.
The vice-chancellor is arguably the most powerful public servant in Dunedin, overseeing an business operation with an annual income approaching $580 million, and shouldering responsibility for 22,000 students and about 4000 full and part-time staff.
The position comes with an attractive salary. In the year to the end of June 2009 - the latest State Services Commission figures available - Prof Skegg's salary was in the $530,000-$539,000 bracket.
Dunedin Mayor Peter Chin, who sits on the university council, described Prof Skegg yesterday as a "quiet achiever".
"He is a really effective vice-chancellor who has changed the course of the university and concentrated on making it a university of excellence with an emphasis on research ...
He has earned and deserves the respect of all those who have worked with him."
Simon Wilson, Otago University Students Association president in 2008 and a student representative on the university council in 2008 and last year, said yesterday he had immense respect for Prof Skegg, despite "not always seeing eye to eye with him" on issues such as increasing student fees and the introduction of the code of student conduct.
"He is incredibly hard-working, incredibly intelligent and Otago is lucky to have him."
The Otago branch of the Tertiary Education Union, which represents more than 1000 Otago staff, was "saddened" by Prof Skegg's decision, co-president Dr Brent Lovelock said yesterday.
"Since [he assumed] the position of vice-chancellor the TEU has been able to develop a positive relationship with university management, assisted by Prof Skegg's role in building a management team that values union input and involvement.
The relationship has been at all times cordial, and we will miss the frank and open exchange of views."
However, Dr Lovelock said the next six to 12 months, when parts of the university were being restructured, would be a "crucial test" of whether the vice-chancellor would be able to maintain the support of staff.
